Perfectly Competitive Markets

These flashcards cover key concepts related to perfectly competitive markets, including definitions, equations, and principles of firm behavior.

Perfectly Competitive Market

A market with many buyers and sellers where each has a negligible impact on the market price.

Price Takers

Firms in a competitive market that accept the market price as given.

Total Revenue (TR)

Total earnings a firm makes from selling goods, calculated as TR = Price (P) × Quantity (Q).

Marginal Revenue (MR)

The additional revenue from selling one more unit, which equals price in a competitive market.

Average Revenue (AR)

Total revenue divided by the quantity sold; for competitive firms, AR equals the price.

Profit Maximization

The process of determining the production level where a firm's marginal cost (MC) equals marginal revenue (MR).

Shutdown Decision

A short-run decision to cease production when the firm cannot cover its variable costs.

Exit Decision

A long-run decision to leave the market when a firm continuously incurs losses.

Sunk Costs

Costs that have already been incurred and cannot be recovered, which should not affect future decisions.

Long-run Equilibrium

A state in which market supply equals market demand, and firms earn zero economic profit.

Average Total Cost (ATC)

The total cost per unit of output, calculated by dividing total costs by the quantity produced.

Competitive Firm's Supply Curve

The portion of the marginal cost curve that lies above the average variable cost curve.

Zero Economic Profit

A situation in which total revenue equals total costs, leading to no incentive for firms to enter or exit the market.

Market Entry and Exit

The dynamic in competitive markets where firms enter when they can earn profits (P > ATC) and exit when they incur losses (P < ATC).

Profit Calculation

Profit is determined by the formula Profit = (Price - Average Total Cost) × Quantity.

Price Above ATC

Indicates that firms are making a profit in the market.

Price Below AVC

Indicates that a firm is better off shutting down in the short run.